Imagine a world where agreed terms and conditions are executed seamlessly, without intermediaries and with iron clad security and finality. A world where businesses can effortlessly automate complex financial tasks and agreements, reducing costs and boosting efficiency. That’s the world smart contracts can build.
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What Is A Smart Contract?
Smart contracts are code that’s stored on the blockchain and that automatically execute predefined actions without having to involve any external intermediaries. Once deployed on the blockchain, they are set and cannot be changed.
For example, the contract might automatically send some funds to another address once goods have been received and verified by the buyer.
These self-executing programs are designed to perform specific tasks when predetermined conditions are met, such as transferring funds, and once they’ve completed are irreversible just like other transactions on the Bitcoin network.
The creator of the contract defines the rules together with the various parties involved and then saves it onto the blockchain. Once there it remains forever as everything on the Blockchain is Immutable and cannot be altered.
It should be noted that difference cryptocurrencies each have their own blockchains and also their own smart contract scripting language. For example Bitcoin’s scripting language is simply referred to as Bitcoin Script and is made up of a set of 186 opcodes, where as on the Ethereum network, Ethereum smart contracts are written in its Solidity computer program language.
How Smart Contracts Work
Smart contracts operate on an “if-then” logic and not legal language or terms of contract like traditional contracts do. They automatically run specific code when predetermined conditions are met and the details and transactions are all recorded forever on the blockchain.
A smart contract can retrieve data as well as handle transactions and carry out specified conditions after a set time delay. This gives the programmer considerable flexibility to create new and useful things that interact with the Bitcoin digital currency.
In order to create a smart contract you must write it using the specific smart contract’s code that defines the conditions and tasks. Then the user must deploy it on a blockchain platform and verifying its validity.
No-code smart contract platforms have also emerged, allowing users without coding expertise to craft smart contracts using user-friendly interfaces and templates just like WordPress and other content management systems have made creating websites easier.
By ensuring that all relevant parties are held accountable once an agreement is executed, and by maintaining clear and unalterable transactions, smart contracts remove the need to trust third parties and speed services up.
It’s also possible to have completely anonymous parties form contracts and agreements without the need for a central authority or external enforcement mechanisms.
From digital identity to real estate, insurance and voting systems, smart contracts are offering some extremely interesting ways to automate a number of different industries. These processes previously would take people or companies a lot of time and manual labor and are now being streamlined as a result.
Blockchain Technology
Just as a quick refresher, a Blockchain is a distributed database, also referred to as a distributed ledger, that’s shared between many nodes on a network. They are most commonly used in cryptocurrency networks, but they have been used for other things too. The data that’s stored in a blockchain is immutable, meaning that it can never be changed.
Let’s break down some of those key terms to further clarify that paragraph:
- Blockchain: A type of database or file, similar to an Excel spreadsheet
- Distributed: This means there is more than one copy stored throughout the world
- Node: Any computer or server that runs the software and is part of the blockchain network
- Immutable: This means that the data can never be altered or deleted
In order to keep track of who owns what tokens or coins, cryptocurrencies use blockchain technology. This big database or file is constantly updated to show who owns what. For example it might say “Bill owns 1 bitcoin”.
Smart contract code is stored entirely on this underlying blockchain technology and is self executing. This means that once it’s been deployed, you don’t have to keep your computer on or wallet open for them to run.
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